Massive Gold Investment Buying 2

Gold's strong gains so far this year have been overwhelmingly fueled by one
dominant driver, massive investment buying. After shunning prudent portfolio
diversification with gold for years, investors are finally starting to reestablish
those essential positions. And since their collective gold holdings were so
incredibly low heading into 2016, reflecting hyper-bearish sentiment, gold's
investment buying has only begun.

Nothing is more important for driving prevailing gold price levels than investment
demand. This isn't as intuitive as it sounds, as gold's global supply-and-demand
fundamentals imply otherwise. The best data available on this front comes
from the venerable World Gold Council, which publishes outstanding Gold Demand
Trends reports quarterly. They offer a valuable fundamental perspective which
is unparalleled.

Per the WGC's data, in 2015 and 2014 jewelry accounted for 57.2% and 58.6%
of gold's world demand. That's about 4/7ths, a typical proportion throughout
most of modern history. Meanwhile in those same recent years, investment demand
was only responsible for 21.4% and 19.4% of total demand. Running at about
1/5th, far less than jewelry, it's hard to imagine investment demand dominating
gold price levels.

Yet it does, and always has. The reason is investment demand is wildly
variable, while jewelry demand is relatively stable. When investors flock
to gold like we've seen in 2016, gold prices surge dramatically no matter
what's going on in jewelry. Q1'16 again proved this, with gold rocketing
16.1% higher for its best quarterly performance since Q3'86! So jewelry demand
at 4/7ths of the total had to be robust, right?

Rather shockingly, just the opposite was true. Q1'16's total gold jewelry
demand per the WGC plunged by 19.3% year-over-year and 27.3% sequentially from
Q4'15! That collapse was due to political turmoil in India, gold's second-largest
jewelry market after China, after government proposals to raise taxes on the
gold trade including jewelry manufacturing. But the point here is gold investment
demand trumps all.

The best read on world gold investment demand absolutely comes from those
quarterly GDT reports. As a long-time gold investor and speculator, they are
my most-highly-anticipated gold data by far. But the quarterly resolution is
far too sparse to support buying and selling decisions. Also these quarterly
GDTs aren't released until about 6 weeks after quarter-ends, because of the
intensive efforts getting this data.

But thankfully there's an excellent daily proxy available on investment
capital flows into and out of gold. Every morning when I sit down at my desk,
it's the first thing I check. It's the total gold bullion held in trust for
the world's leading GLD SPDR Gold Shares gold ETF. Every trading day, GLD's
managers publish comprehensive data on this ETF's entire gold holdings down
to the individual-gold-bar level!

As of the middle of this week, this list of every bar's serial number, refiner,
gross weight, fine weight, and assay purity was 1413 pages long. But it's the
aggregate total gold held that is of supreme interest to anyone trying to game
gold trends. The reason GLD's holdings are so important is this ETF effectively
acts as a conduit for the vast pools of American stock-market capital
to migrate into and out of physical gold.

GLD's mission is to track the gold price. But GLD's shares have their own
separate supply and demand that is totally independent from gold's. Thus the
GLD share price is always threatening to decouple from gold's. If the pace
of GLD share demand exceeds gold's, GLD's price will break away to the upside
and fail its mirroring mission. If GLD share supply exceeds gold's, this ETF
will drift away from gold to the downside.

The only solution is to shunt excess GLD-share supply and demand directly
into underlying physical gold bullion itself, equalizing those forces
between the ETF and metal. GLD's managers accomplish this by issuing and redeeming
shares. When GLD demand is outpacing gold's, they issue enough new GLD shares
to offset that differential excess demand. The cash raised is then used to
buy more gold bullion.

When GLD supply exceeds gold's, they buy back enough existing GLD shares to
absorb that differential excess supply. These buybacks are paid for by selling
a portion of GLD's gold-bullion holdings. Thus the fluctuations in GLD's daily
holdings levels literally reveal stock-market capital flowing into or out
of physical gold. GLD's bullion holdings rise on inflows from investment
buying, and fall on outflows from selling.

Now GLD's holdings aren't just important because they are reported daily.
As of the end of 2015, GLD's 642.4 metric tons of gold held in trust for its
shareholders represented a dominant 40.0% of the total for all the world's
gold ETFs! The second-place competitor merely held 9.5%, GLD's reign is unchallenged.
Much to the chagrin of GLD
conspiracy theorists, this WGC-created ETF has become the dominant
gold force.

While nothing is more important for driving prevailing gold prices than investment
demand, there is no more important source of investment demand than American
stock investors buying GLD shares. It is these capital inflows into this single
leading ETF that are responsible for much of the massive gold investment demand
seen so far in 2016. GLD buying is the primary story behind this year's
mighty new gold bull!

This first chart looks at GLD's daily gold-bullion holdings in tonnes superimposed
over the gold price during the past several years or so. Each calendar quarter's
GLD-holdings build or draw is noted in both percentage and tonnage terms, and
compared to gold's same-quarter price action. GLD shares have been aggressively
bought at a torrid pace by American stock investors prudently seeking portfolio
gold exposure.

Gold's reversal of fortune over the past half-year has been epic. In mid-December,
gold slumped to a major 6.1-year secular low after the Fed's first rate
hike in 9.5 years. But that reaction was sentimental, it had no fundamental
justification. Gold
has actually thrived in past Fed-rate-hike cycles, with impressive average
gains of 26.9% during the exact spans of all 11 since 1971! Rising rates boost investment
demand.

Gold's late-2015 psychological woes proved to be the end game in a long mass
exodus of stock-market capital from GLD shares, forcing huge gold-bullion
sales. Between GLD's record gold-bullion-holdings peak of 1353.3t in early
December 2012 and their 630.2t trough in mid-December 2015, huge differential
selling forced this ETF to liquidate 53.4% of its holdings or a whopping 723.2t!
This blasted gold 38.3% lower.

The catalyst for this extreme GLD liquidation far beyond anything ever witnessed
before was the Fed launching and expanding its third quantitative-easing campaign
in late 2012. QE3 was unprecedented in that it was open-ended. Unlike
QE1 or QE2, there was no predetermined size or end date for these enormous
new bond monetizations by the Fed. This fueled recent years' radically-distorted
financial markets.

Fed officials deftly used QE3's ambiguity to their advantage to actively manipulate
psychology among stock traders. Whenever the already-lofty stock markets threatened
to roll over into a healthy pullback or correction, top Fed officials rushed
to reassure that QE3 could be expanded if necessary. This led to a crazy stock-market
levitation, stock markets that did nothing but rise on balance thanks to
the implied Fed Put.

These artificial one-way stock markets led investors to forget the wisdom
of keeping their portfolios well-diversified with gold, which rather uniquely
tends to move counter to stock markets. So they started to exit gold
en masse, and GLD selling was the sharp end. All gold's endless sentimental
woes of recent years originally sprung from an epic GLD liquidation in Q2'13,
the most extreme GLD differential selling ever.

Understanding what happened in Q2'13 is necessary to understand what's happening
in 2016. That fateful quarter investors sold so many GLD shares that they forced
a mind-boggling 251.8t holdings draw! That single quarter was responsible
for 34.8% of GLD's total draw over recent years. And with GLD being forced
to spew out 20.6% of its holdings to keep tracking gold, the gold price plummeted
22.8%.

That proved gold's worst quarter in an astounding 93 years! Fully 55.7%
of gold's total loss between late 2012 and late 2015 came in that one awful
quarter. And GLD was solely responsible. The WGC's Q2'13 GDT reported
that total global gold demand plunged by 12.1% YoY or 118.3t. GLD's crazy-big
251.8t draw was more than double the overall global demand drop! Jewelry
demand actually soared 36.8% YoY.

So there is powerful precedent of American GLD-share trading utterly dominating gold
price action in past extreme quarters. This same phenomenon in reverse just
happened in Q1'16, igniting gold's first new bull market since 2011.
American stock investors flocked back to GLD to regain some critical gold portfolio
exposure after the US stock markets suffered their worst selloff in 4.4 years.
Their levitation was failing.

Q1'16's GLD-share buying was so extremely intense that this ETF's managers
were forced to boost its physical-gold-bullion holdings by a staggering 176.9t
or 27.5%! The gold investment buying via GLD was so massive that it had to
shunt incredible amounts of excess demand into gold to keep GLD from decoupling
sharply to the upside. Investors returning to gold after years of neglect
is driving this new bull.

And much like Q2'13, GLD's role in Q1'16 was dominant. Remember jewelry demand
dropped by 19.3% YoY in Q1 as the major Indian jewelry industry went on strike
to protest proposed tax hikes on it. Yet overall gold demand still soared 20.5%
YoY to 1289.8t. And traditional bar-and-coin investment didn't help at all,
as it was only up 0.7% YoY to 253.9t. Q1'16's entire gold demand surge was
driven by ETF buying.

The World Gold Council's elite researchers reported that global gold-ETF demand
skyrocketed an epic 1320.7% higher YoY to 363.7t in Q1'16! That was the only
significant gold-demand category that jumped. And of those 363.7t of gold purchased
by ETFs on behalf of their shareholders, a dominant 48.6% came from GLD
alone! This year's massive gold investment buying is from American stock
investors returning to GLD.

And GLD's role in this year's new gold bull is even more dominant than that
suggests. Total global gold demand climbed 219.4t in the first quarter, so
the GLD holdings build alone was a whopping 80.6% of that! Without that huge
GLD-share differential buying, world gold demand would've barely risen after
that big jewelry plunge. So three cheers for American stock investors remembering
portfolio diversification.

And bullishly for gold, that massive Q1'16 investment buying wasn't just a
flash in the pan and remains far from over. So far in the second quarter,
GLD's holdings are up another 61.9t or 7.6%. That's a huge build, easily the
second biggest in recent years. This continuing strong differential GLD-share
demand from investors is pretty impressive considering the lackluster gold
price action that has plagued much of Q2.

In its new bull run, gold first hit this week's low-$1260s levels in early
March. So other than surging to new highs near $1294 briefly in late April,
gold has essentially been consolidating in a sideways grind for 3.2 months.
That's hardly likely to inspire confidence in an asset class that was universally
despised just a few months before that. Yet after an April lull, stock investors
resumed strongly buying GLD in May.

May's GLD holdings build of 64.5t wasn't far behind February's massive 108.0t,
which was the biggest monthly build GLD had witnessed in exactly 7 years. So
even though gold was really overbought on a short-term basis, even though American speculators were
ramping their gold-futures
long positionsto record levels which is an ominous contrarian indicator,
investors continued to aggressively add gold exposure.

There are many reasons. Gold was hammered to secular lows late last year on
epic bearish sentiment that was wildly unjustified fundamentally, so
it needs to mean revert radically higher. Before the Fed's extreme QE3 distortions
slammed gold in early 2013, it averaged $1669 in 2012. And with the Fed's printing
presses puking out freshly-conjured money like there's no tomorrow, gold thrives
in inflationary times.

But perhaps most importantly of all, these artificial Fed-levitated stock
markets remain way overdue to roll over into a major
new cyclical bear that will at least cut stock prices in half. So
investors desperately need to diversify their stock-heavy portfolios to prepare
for the return of normal market cycles. And even now they remain radically
underinvested in gold by recent standards, so their migration back is far from
over.

This final chart expands on GLD's role as the dominant gold-investment proxy,
looking at the ratio of the total capital invested in GLD to the total market
capitalization of the flagship S&P 500 stock index. This metric effectively
shows how much portfolio exposure American stock investors have to gold. Despite
all their massive buying so far in 2016, their gold diversification still remains not
far above major secular lows.

As of the end of May, the total value of GLD's physical gold bullion held
in trust for its shareholders was just 0.175% of the S&P 500's total market
cap. That actually wasn't much of an improvement from this ratio's 8.0-year
secular low of 0.111% in mid-December. American stock investors' portfolio
exposure to gold has merely climbed from just over 0.1% to well under 0.2%
so far this year! That's still utterly trivial.

For many centuries if not millennia, the world's smartest and most-successful
investors have advocated having at least 5% of every portfolio invested
in gold. As the ultimate diversifier, owning gold is one of the best forms
of portfolio insurance. When some major selling event hammers the rest of a
portfolio, like an overdue cyclical stock bear artificially delayed by the
Fed, gold surges to offset some of those losses.

While it's a big stretch to see American stock investors collectively put
5% of their capital into gold, there is plenty of precedent for them having
much-higher portfolio exposure. Between 2009 and 2012, which were the last
normal years before the Fed's QE3 greatly distorted everything, the ratio between
the value of GLD to the S&P 500's market cap averaged 0.475%. There's no
doubt it will mean revert back up there.

Those pre-QE3 levels of American stock investors' portfolio gold exposure
per GLD still remain 2.7x higher than today's levels after that massive
2016 gold buying! Investors have much more gold buying left to do than they've
already done merely to restore recent years' levels of normality in their portfolio
gold exposure. And during a major stock bear, there's a good chance their gold
exposure will dramatically overshoot.

The last bear market in stocks ran from October 2007 to March 2009, in which
the flagship S&P 500 full of the biggest and best American companies plunged
56.8%. Over that exact span, GLD's holdings soared 75.7% higher which helped
drive gold up 24.8%. Assuming a new stock bear started back at May 2015's all-time-record
S&P 500 peak, a similar move today would catapult GLD's holdings to 1257.0t.

That's another 375.8t higher from this week's levels, and dwarfs GLD's massive
238.8t year-to-date build. Interestingly such GLD levels are close to its 1208.5t
average holdings seen between those last normal years of 2009 to 2012. But
I suspect that level of GLD holdings will be far exceeded during this next
cyclical stock bear. GLD was only born in November 2004, so its reputation
wasn't established in that last bear.

Since then, GLD has grown into a gold juggernaut that overwhelmingly
drives this metal's biggest price moves seen in many decades. Most serious
investors now know about GLD's ability to instantly and cheaply add portfolio
gold exposure. So the number of investors and amount of capital likely to flood
into GLD during this next stock bear is far greater than the relatively-modest
inflows seen in the last one.

In addition, investors lulled into extreme complacency by the Fed's blatant
manipulations of recent years are going to be totally shocked when normal market
conditions inevitably resume. Artificially-levitated stock markets are almost
certain to fall faster than non-inflated ones. And the quicker the stock markets
drop, the more investors will be motivated to lighten their stock-dominated
portfolios and diversify into gold.

I've spent over 16 years now intensely studying and actively trading gold,
silver, and the stocks of their miners. And there's no doubt that GLD's rise
to gold dominance has made it impossible to understand and game the gold market
without closely following this leading ETF's bullion holdings. Investors who
aren't paying attention to stock-market capital flowing into and out of gold
via GLD are foolishly flying blind.

At Zeal we've long specialized in holistic analysis considering everything
important to a given market. We dig up and crunch the raw data until we understand
exactly what's moving markets. And in gold's case these days, it is stock-market
capital flows via GLD and American futures speculators' collective bets. If
you're not closely following these dominant gold drivers, your efforts to buy
low and sell high will fail.

We can keep you informed through our long-published acclaimed weekly and monthly newsletters.
They draw on our vast experience, knowledge, wisdom, and ongoing research to
explain what's going on in the markets, why, and how to trade them with specific
stocks. Over the decades we've helped our subscribers multiply their wealth
with many hundreds of gold-stock and silver-stock trades. And we're currently
preparing for an expected major buying opportunity later this summer.
Now is the time to get ready. Our newsletters will help you learn to think,
trade, and thrive like a contrarian for just $10 per issue. Subscribe
today!

The bottom line is gold's young new bull market was driven by massive investment
buying. Nearly all of that came from stock investors flooding into gold-ETF
shares, led by the dominant American GLD. And investors' migration back into
gold remains far from over. Heavy GLD buying continued in May despite gold's
high consolidation of recent months. Investors still remain radically under-deployed
in gold even today.

The American stock investors scrambling to diversify their stock-dominated
portfolios with gold via GLD shares ahead of the coming bear have barely started.
They have vast buying left to do merely to return their portfolio gold exposure
to pre-QE3 normal-year levels. Thus the massive gold investment buying has
only begun. It will likely take years to complete, driving gold's new bull
higher on balance the entire time.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
subscribe.